What are Tax Liens?
When a property owner fails to pay property taxes for a specific amount of time, a tax lien is filed against him or her by their local government or county. The local government or county then sells the lien – at auction – to an authorized third party, who in turn collects on the lien, which is the taxes owed which is often a substantial interest. The tax lien purchaser can make a significant amount of money in as little as a few days. The tax lien purchaser also buys the right to own the property if the delinquent property owner fails repay the lien amount plus interest within a specific amount of time. "
The Payoff – What You Can Expect to Accomplish
With tax liens, you can make a significant amount of money in short amount of time due to the high interest rates on tax liens (New Jersey offers 18% per year for a two year period, plus an additional penalty of up to 6%). The exciting part is that if a bank forecloses on the property within the tax lien repayment period, they will pay you the cost of the lien plus interest at full maturity. In other words: Mr. Sanders purchases a Tax Lien Certificate in Illinois worth $10,000, with the full 36% interest rate, and the bank forecloses on the property the following day. The bank will pay Mr. Sanders $19,000 – what the lien plus interest would have been at full maturity or 36% a year times 2½ years. In this situation, Mr. Sanders would make $9,000 – almost doubling his investment in a single day.
Purchasing a tax lien gives the purchaser the right to own the property, if the lien is not repaid. In that situation, the property would have been bought for just the taxes owed. So, if the tax lien owned by Mr. Sanders has not been repaid after two-and-a-half years, he will now own the property for just $10,000 – his initial investment.
The risk on tax liens is very low for four main reasons: (1) state and local governments control the tax lien process, ensuring stability; (2) property owners risk losing their property if they do not repay the lien with interest; (3) in most states you receive the property if the delinquent owner does not repay the lien plus interest; (4) the value of a tax lien is not affected by the economy (unlike the stock market). In fact, a poor economy usually means that more people fail to pay their property taxes, enhancing the amount of tax liens available.
Investing in tax liens is something that very few people understand. Every year there are thousands of tax lien sales. And when these sales happen, there are usually hundreds of liens available, giving you a great chance to find a valuable investment at an extremely discounted rate.
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The Payoff – What You Can Expect to Accomplish
This is where the money is made. For example, in Illinois, the interest rate ranges from 18%-36% a year, with a two-and-a-half year redemption period. Additionally, if the bank or local government were to foreclose on the property, the lien holder would be eligible to receive full maturity on the lien. So say for example, Mrs. Jefferson would purchase a Tax Lien Certificate in Arizona worth $10,000 and the bank or local government were to foreclose on the property the following day, they could be obligated to pay Mrs. Jefferson $11,600 – the cost of the lien at full maturity.
However, if the property owner would fail to pay the lien back, and the bank or local government failed to foreclose on the property, the third party may be able to file a lien foreclosure, which can lead to a Tax Deed Sale (which you can read about here). The property owner and all possible lien holders have been informed of the legal implications of their failure to pay property taxes. The tax deed sale will usually result in either the property being transferred to the third party directly, or would give the property owner the right to make the first bid on the property.
A Tax Deed Sale is a public sale, usually at auction. More importantly, the now owner of the property after the lien foreclosure/tax deed sale, owns the property free and clear. All other liens are usually wiped out – property taxes take precedent, because the government wants to be paid – and any mortgages no longer use the property as collateral. What this means is that you would most likely own the property free and clear; however, it is best to check with local officials to ensure that the original property owner has no right of redemption.
